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Uncertainty over tax changes has handcuffed U.S. companies. REUTERS/Joshua Roberts (JOSHUA ROBERTS/REUTERS)
Uncertainty over tax changes has handcuffed U.S. companies. REUTERS/Joshua Roberts (JOSHUA ROBERTS/REUTERS)


Tax uncertainty handcuffs U.S. firms Add to ...

The political compromise to raise the U.S. debt ceiling this week will do little to ease business confidence because it leaves untouched the most significant barrier to investment: uncertainty over taxes.

House Speaker John Boehner boasted Monday that Republican negotiators had successfully blocked "job crushing" tax increases from being included in the agreement to lift the $14.3-trillion borrowing limit, even as President Barack Obama pledged to use the next few months "to make a detailed case" for why tax increases must be part of the ultimate deficit-reduction package.

This is the sort of mixed message that makes executives crazy. When the economy is strong, the prospect of rising sales outweighs the uncertainty of a future tax hit. But when the economy is weak, as America's is now, companies would rather hoard their earnings than make investments that could be made unprofitable by a change in the country's tax structure.

So by opening the door to a "grand bargain" earlier this month that would have included overhaul of U.S. tax policy, and then closing it to settle for a more limited debt agreement, politicians only added to the confusion. The risk is that companies will continue to guard their profits, condemning the United States to a weak recovery characterized by high unemployment.

"I could hire another 15 or 20 people, but I'm scared to death to do it because I'm afraid some tax change will come through," said Clint Greenleaf, chief executive officer of Greenleaf Book Group LLC, a publisher based in Austin, Tex.

"It stifles growth," Mr. Greenleaf said of Washington's inability to come up with a coherent approach to taxes. "I'm not going to leverage the future of my 50 employees on the hope that the government won't hurt me in the future."

Economic growth nearly stalled in the first quarter and advanced at a sluggish annual rate of 1.3 per cent during the second, the U.S. Commerce Department reported last week.

One of the reasons for the persistent economic weakness is that executives have retrenched. Non-financial companies based in the U.S. held $1.24-trillion (U.S.) in cash at the end of 2010, an 11 per cent increase from 2009, according to Moody's Investors Service. Companies' debt-to-cash ratio was the lowest in five years, Moody's said, another indicator that executives are reluctant to invest.

The Congressional Budget Office, the independent branch of the U.S. legislature that scores legislative proposals, confirmed Monday that the debt proposal would shrink the deficit by at least $2.1-trillion over 10 years, an amount that is probably hefty enough to preserve America's triple-A credit rating in the short term.

Democratic and Republican leaders continued to predict the debt-ceiling would be raised, even though voting wasn't scheduled to be completed until Tuesday. That leaves open the possibility of a last-minute snafu that would leave the Treasury precariously short of cash. Tuesday is the day the Treasury said it would begin running out of money, without renewed borrowing authority, to pay the government's bills.

Even though most economists say taxes must eventually go up if the government is to pay for rising health and pension obligations, lawmakers shied away from addressing taxes immediately. The legislation would cut spending of $917-billion and calls for the creation of 12-member commission of Democrats and Republicans to come up with a strategy to shrink the deficit by a further $1.5-trillion.

Democrats will use this stage to push a tax overhaul that would raise revenue, further muddying the future for businesses.

"The future of the tax code is uncertain, so people are unable to make intelligent business decisions," said Ray Zuckerman, chief executive officer of Serverlift, a Phoenix-based maker of equipment that lifts and transports computers in data centres. "What we are all trying to do is hoard cash to wait and see what direction things are going to go."

Robert Dugger, managing director of Hanover Investment Group, says companies already are budgeting "fiscal adjustment cost," holding back funds to help absorb financial shocks they believe will be delivered by governments gripped by austerity politics. These shocks could range from higher taxes to political gridlock resulting from an ideological clash over the budget.

"When projected shortfalls become worrisomely large and politics becomes polarized, executives and investors take protective action," Mr. Dugger argues.

U.S. executives are pushing hard for a rewrite of the U.S.'s notoriously complex tax code, many saying they would happily give up the numerous tax breaks aimed at business for a simpler system that lowered the benchmark corporate rate.

While Americans are generally among the least taxed in the developed world, the country's corporate income tax rates are among the highest. Companies also bristle over the government's insistence on taxing profits earned abroad. Moody's estimates that about $600-billion of corporate America's cash pile was sitting overseas, at least in part because executives were anticipating lower taxes on repatriation.

Thomas Falk, chief executive officer of Kleenex-maker Kimberly-Clark Corp., told the Senate Finance Committee last week that his profits are taxed by the federal and state governments at a rate of 39 per cent, compared with an average of 25 per cent in developed countries.

"One of the challenges of running a business today is the level of uncertainty that's out there," Mr. Falk told lawmakers. "So uncertainty on tax policy doesn't help."


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